Towards a Carbon Tax in Bangladesh

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December 2018
Sadiq Ahmed, Bazlul H. Khondker
Economic Dialogue on Green Growth (EDGG), UK aid

Bangladesh is a strong actor in the effort to reduce global carbon emission. This is appropriate as it faces a major adverse burden from global climate change. Although per capita carbon emission is low, total carbon emission in Bangladesh is growing. Consequently, as a good global team player, Bangladesh committed to reducing its carbon footprint in its Intended Nationally Determined Contributions (INDC) submissions in 2015.

The strategy for reducing carbon emission relies almost entirely on regulations, investments and technology. There is hardly any use of incentive policies. A recent paper showed the great potential for using incentives, especially fiscal policy, to improve environmental management in Bangladesh also mobilizing revenues while (Ahmed 2018). The paper notes that a balanced carbon emission reduction strategy will need to combine regulations with fiscal incentives to reduce air pollution and adopt clean energy. In that context, it advocates the use of a carbon tax as a fiscal policy instrument to curb the use of fossil fuel and thereby lower carbon emission.

The objective of this paper is to examine the use of a carbon tax for lowering carbon emission while raising public revenues in Bangladesh. Both are important development objectives and are inter-related. The heavy reliance on fossil fuel for energy is partly driven by the virtual absence of clean energy. This is to a substantial extent owing to the shortage of resources. Similarly, choices of clean technology are constrained by the lack of research and adaptation spending for clean technology. More broadly, poor environmental outcomes in Bangladesh are partly due to inadequacy of policies and institutions including the virtual absence of the use of fiscal policy instruments, but they are also owing to inadequate public spending on environmental programmes and institutions.

The paper is organized as follows: after the introductory statement in Section I above, Section II provides an analysis of the carbon emission challenge in Bangladesh. The distinction between greenhouse gases and carbon emission is clarified in this Section, as these two concepts are used confusingly in Bangladesh. Section III contains a review of Bangladesh’s INDC commitment and the approach being used to secure those commitments. The absence of fiscal policy instruments as a constraint to lowering carbon emission is brought out to provide the case for introduction of a carbon tax. Section IV then develops the carbon tax policy based on global experience and the Bangladesh political economy context. In Section V, the simulation results of the proposed carbon tax are discussed. A business as usual (BAU) scenario is first established that defines the status quo as presently with no carbon tax. This is then compared with two policy scenarios: the most likely and politically feasible scenario that constitutes the Low Policy Case (LPC) and a more unlikely but desirable High Policy Case (HPC) that yields stronger CO2 reduction outcomes but would likely be politically challenging for implementation. Section VI concludes the paper with a brief summary and concluding remarks. Annex A provides details of the analytical framework and models used for the policy simulations.